The emergence of Ordinals has reignited the source of creativity and innovation in the Bitcoin community. We believe that in the long run, now is the most exciting trading concept opportunity and the direction we have been working towards for several months. Go long on STX coins.
STX coin is a token of Stacks, the most advanced L2 of Bitcoin (more on what Bitcoin L2 is later). We have been following STX for some time as we have been searching for horizontal ways to participate in the upcoming BTC halving in over a year (currently estimated to be March 4, 2024).
Why is STX important at this time? Add some background here.
In history, Bitcoin can only exist on the steep part of its S-curve. This means that price appreciation is sufficient to offset the reduced safety caused by each halving. The price of BTC doubles more than every four years, so Bitcoin’s absolute security budget continues to grow and has never been affected.
However, as BTC has matured as an asset, it is evident that relying on price appreciation to offset the quadrennial production reduction is not sustainable in the long run. To illustrate this, if BTC doubles every 4 years and then halves 5-6 times (20-24 years), it will be even larger than the global M2. Exponential returns are unsustainable for any asset as the money supply does not grow exponentially.
This gives Bitcoin two options for long-term security. Either cancel the hard cap and implement tail end issuance, or the Bitcoin community must find a way to generate a sustainable cost pool to compensate miners, rather than relying solely on issuance.
Due to various reasons, the tail issuance plan is not advisable. Firstly, the hard upper limit of Bitcoin is the key Schelling point of its value, and removing this core principle would damage its attractiveness. Secondly, in the initial white paper, it was pointed out that a secure long-term path was intended to come from the cost incurred. Therefore, implementing tail issuance and abandoning Satoshi Nakamoto’s original vision is essentially acknowledging the failure of Bitcoin players. Finally, a SoV with sustained inflation is objectively worse than a SoV with both supply limits and safety. The purpose of SoV is to store value over time, and sustained inflation directly goes against this goal.
Due to these reasons, we are well aware that in the long run, generating a sustainable cost pool is a more attractive option than Bitcoin. At present, it is uncertain whether Bitcoin can generate a sufficiently large fee pool to completely avoid tail end issuance, but we believe it is clear that the community will put a lot of effort into trying to achieve this goal, and now BTC is maturing as an asset.
Due to Bitcoin being the largest cryptocurrency by market value, it has a huge capital base and users who are already familiar with the principles of cryptocurrency. However, today there is only a small cryptocurrency economy built upon it. Of course, developing a more comprehensive ecosystem is challenging. Despite these limitations, there is still a huge opportunity to develop a cryptocurrency economy based on Bitcoin.
The L1 Bitcoin layer is not designed to optimize composability, so it is bulky and inefficient for more complex applications. For most applications, building on L2 and ensuring the value of L1 is a more reasonable design, which is exactly what Stacks does.
There are three main L2, Lightning, RSK, and Stacks on Bitcoin. They are different from Ethereum’s L2, and we will soon discuss these differences, but for simplicity, we will use the L2 term here. Each L2 is complementary and has different goals, but among these three L2s, Stacks has gone the farthest in developing ecosystems for more traditional cryptocurrency applications (NFT, DeFi, domain name services, etc.). It has the most advanced NFT ecosystem The BTC naming service is located on STX, and the next upgrade this year will further enable the DeFi application. In addition, it is the only project among the three that has a token.
Stacks, in its current form, are not the traditional Ethereum L2. Having one’s own validator is necessary to add flexibility to the current state of Bitcoin L1, but it does indeed abandon certain trust assumptions of L1. That is to say, censorship resistance is inherited from the Stacks signer, while reassembly resistance is inherited from Bitcoin L1.
Due to the technological limitations of Bitcoin L1, censorship resistance is impossible today (you need to change Bitcoin L1 to achieve this). The review resistance of Stacks comes from a group of scattered signers who place STX in the system and separate it from miners. These dispersed signers have created strong economic incentives for the movement of BTC from L2 to L1. This is currently the best option that exists, and in our view, it is already very powerful. The current solution provides a lot of value for the Bitcoin ecosystem. It provides an environment for exploring the development of a local Bitcoin cryptocurrency economy (a long-term need to generate security budgets), supplementing Bitcoin security by paying BTC fees at the basic layer, and generally developing the Bitcoin ecosystem. We believe that this is the best solution for the wider development of the Bitcoin economy today, and it is also a feasible long-term solution.
However, if Bitcoin L1 makes necessary changes to support more traditional L2, and even stronger security assumptions, Stacks has always insisted that they will accept this and become a more traditional L2, in line with the definition of Ethereum L2. If this situation occurs in the future, it will further expand Stacks’ TAM (Technology Acceptance Model), and they will still be able to benefit from existing development and will dominate the market share during this period.
In 2017, Stacks was founded by its founder Muneeb Ali from the Department of Computer Science at Princeton, and has been dedicated to bringing composability to BTC since then. Muneeb’s experience in building agreements on Bitcoin L1 can be traced back to 2013.
Technically speaking, things are very difficult, and culturally speaking, it is not always compatible with the Bitcoin community.
However, multiple catalysts and turning points occurring at the same time will make these power steering favorable for the stack. From a technological perspective, Stacks will undergo a transformation and upgrade later this year, named Nakamoto, which will promote the development of more traditional cryptocurrency application types, such as Opensea and Uniswap, which exist in the Bitcoin network through Stacks. Nakamoto will generate subnets, which will support other code libraries such as EVM and Solidity, addressing another major challenge in ecosystem development.
In addition, Nakamoto will make synthetic Bitcoin (Bitcoin transferred from L1 to L2) more easily utilized in Stacks networks, greatly increasing network liquidity and generating more traditional DeFi applications. Finally, one of the main factors hindering the adoption of Stacks is the relatively slow time of memory blocks, as they occur in the slow pace of Bitcoin L1. Satoshi Nakamoto will see the implementation of major technological breakthroughs, which will reduce execution time from 10-30 minutes to only a few seconds.
This breakthrough was developed by the core developers of Stacks and computer scientists at Princeton University, which can prove the passage of time between Bitcoin memory blocks through encrypted pipelines. The result will be a user experience similar to Ethereum L2, but built on Bitcoin. This will release a huge TAM, which can be said to be the most important part of Nakomoto’s upgrade. The subnet will also be able to further reduce memory block time by exploring the trade-off between decentralization and speed, without affecting the Stacks base layer.
We expect the upgrade to take place in the fourth quarter of 2023. Overall, this year’s planned upgrade will have a significant impact on Stacks performance and will result in the first truly composable and efficient L2 in Bitcoin history. The potential that this will unleash cannot be exaggerated.
As discussed earlier, Stacks L2 is now the most effective and secure L2 that can be built on top of Bitcoin L1 without changing it – making it a practical and commercial path to operate. If some minor adjustments can be made compared to Bitcoin L1, which is possible in the coming years, then Stacks L2 can integrate with Bitcoin L1’s security in the future. More details about the upgrade can be found in the updated Stacks white paper released last month.
From a cultural perspective, there is still a transformation underway. Over the past year, many prominent members of the Bitcoin community have condemned Bitcoin extremism and welcomed a more flexible mindset.
As the practical challenges faced by Bitcoin in terms of long-term security become increasingly apparent, communities have begun to recognize that they must become more flexible in order for BTC to achieve long-term success and sustainability. This will make the attitude of the entire community more open, as creativity and innovation are more accepted than in the past. The climax of this transformation is the recently launched Ordinals on Bitcoin. Ordinals is a new source language technology that allows data to be engraved on various Satoshis (satellites) on the Bitcoin memory blockchain, effectively creating the ability to turn each individual sat into their own unique NFT equivalent.
As new use cases are established, this new utility drives an explosion of activity, triggering a turning point in the use of Bitcoin on the chain. Bitcoin network fees doubled last month. In addition, this activity is combined with the rapid adoption of Bitcoin Naming Service (BNS), which is built on Stacks L2 and has generated a significant peak in Stacks activity.
Number of Stacks trading accounts
This dynamic has resulted in two outcomes. Firstly, a large amount of development and inspiration further stimulates the community, refocusing their attention on developing a more comprehensive ecosystem built on the foundation of Bitcoin.
Secondly, it reveals the difficulties of directly building on the Bitcoin infrastructure, further emphasizing the necessity of establishing an effective secondary ecosystem. Both of these factors are beneficial for Stacks, and capital and efforts should be directed towards further development of the most prominent Bitcoin L2. There are now over 30 teams building Stacks (many of which we have encountered); Later this year, with the release of Nakamoto and the cultural shift already underway in the community, the ecosystem is ready for adoption. Stacks will seize the huge opportunity to expand the Bitcoin ecosystem.
This is the basic situation, but what is the investment situation of STX? Firstly, there are some additional background information about STX tokens. Unlike many tokens, STX tokens have true value accumulation. Stacks runs on a transfer proof system, and its working principle is somewhat similar to work proof. Miners verify Stacks transactions, but not receive and release them for free. Instead, they must bid for Stacks memory blocks to receive STX rewards for each memory block. They use BTC as the bidding currency, which belongs to STX users who put STX into the network.
This creates a system where miners do the work of verifying transactions, but do not retain all rewards, but instead distribute some rewards to STX holders through their BTC bids. This creates a real BTC return for STX holders (current yield of 7%, connected to https://staking.staked.us/stacks-staking#instructions ）More importantly, it is related to activities on the internet.
With the increase in on chain activity and memory block value, BTC bids from miners will also increase, followed by actual returns for STX holders. This lays an attractive foundation, but the most attractive aspect of the STX investment case is the asymmetry of risk and return.
ETH is worth approximately $200 billion, and we estimate the total FDV of all L2 in the Ethereum ecosystem (including private and public) to be approximately $60 billion. Bitcoin is worth approximately $480 billion, and the overall value of the L2 ecosystem is only STX. The current transaction volume is approximately $100 million for FDVs. The ratio of ETH to ETH L2 is~3.33, while the ratio of BTC to BTC L2 is~480.
It makes sense for Ethereum to have a lower ratio. Ethereum is more suitable as a composable base layer, therefore, the total value located on it will reasonably be more valuable than BTC, as Bitcoin was not specifically built to become a composable layer and its value is currently much lower.
However, the fact that the proportion of BTC is 144 times higher indicates a great opportunity if the Bitcoin community emphasizes this effort and technological improvements to make it more feasible. These two demands seem to be happening simultaneously now. With the progress and better understanding of Bitcoin work, it does not seem unreasonable to move this ratio from 144 times to 14.4 times. This itself represents 10 times the STX. On an individual level, this also makes sense, as the most prominent Bitcoin L2’s FDV of approximately $10 billion is appropriate, as it has no competitors in terms of token value, its importance is increasing, and several Ethereum L2’s transaction volumes are higher than this valuation.
The second driving force behind the STX investment case is the upcoming halving of Bitcoin. Halving itself will reduce Bitcoin’s security budget and further strengthen the need to develop a larger cost pool through a more effective Bitcoin ecosystem. This will reinforce the importance of L2, such as STX.
Furthermore, from a technological perspective, halving would be a grand narrative for the cryptocurrency community, and to benefit from it, many large investors will soon find ways to position their investments. BTC is an obvious candidate. However, due to the size of BTC, its beta coefficient is relatively low compared to other smaller cryptocurrency assets (Editor’s note: Refers to a low rate of return). Therefore, many investors will seek small-scale investment concepts that can also benefit from halving. In the past few months, we have done such practices (Editor’s note: bloggers have successfully placed bets on tokens such as LDO, Magic, and DYDX), and now all paths have been pointing towards STX.
In the Bitcoin ecosystem, there are not many entry tokens, which will focus attention on a few existing tokens, with the protagonist being STX. This will generate very strong momentum as there will be a large pool of funds chasing relatively small asset pools. It may lead to abnormal price fluctuations for smaller assets. This further supports the view that STX as an investment can yield several times the return, which we have demonstrated through fundamental scanning.
No surprise, I believe that STX’s performance in halving Bitcoin is just as outstanding as LDO’s performance in Ethereum’s merger and upgrade. In the six weeks leading up to the merger in July/August, the price of LDO tokens increased by 600%. During a bull market, if the Bitcoin ecosystem develops more meaningfully, I think buying STX now is like buying SOL with a unit price of $1 during the 2021 bull market cycle.
It is rare for events like the current STX to converge together. This is the reason for generating truly asymmetric investment bets. In the next 12 months of halving, I believe STX has a 10 fold upward potential and a 50% probability of decline. Of course, the result is not binary, there is a series of potential outcomes in between; At present, the likelihood of both extremes seems to be equally high.
Further clarification
STX issued its first SEC qualified token in 2019 and has since been decentralized, providing some comfort in today’s harsh regulatory environment.
Author:BticoinKOL,Source:https://bitcoinkol.com/archives/3399
